Below we will explain in detail a strategy trend following trading which uses simple concepts and that most have heard many times. This system is based on a concrete and simple theory and a simple implementation - a winning combination that should be the hallmark of any good trading system.
The system does not use complex technical indicators and several tools that end up charging a chart and make it hard to read other systems, but are able to produce good results, are not best suited for beginners traders. The only real care required is in drawing trend lines as discussed below.
As always, it is recommended to test this system on a demo account before using real money to trade in a live account.
System configuration
- Recommended currency pair: Can be used on any currency pair as well as in other markets, as metals prices and indices.
- Recommended time frames: Frames most appropriate time for this strategy are 30 minutes, 1 hour, 4 hours and 1 day.
- Technical indicators : Only a modified indicator for Metatrader 4 is used called SwingZZ (ZZ is zigzag) which can be downloaded free of charge on the Internet . This indicator is useful because it allows identifying maximum and minimum previous price movements, which act as support and resistance levels, so it is a useful tool for this strategy.
You can download the indicator in the following link:
-a SwingZZ for MT4
Trend lines used in the strategy are plotted using the minimum and maximum determined by the SwingZZ indicator.
System rules
Sales positions
- Identify the general trend in the time frame in which we will operate. First we have an overview of the market for us guidance on what you can do long term. For example, when we will operate under 1 hour is recommended to analyze before the frame time daily and the 4 hour chart to show an obvious trend, a channel or congestion zone in these frames greater time . Thus, if there is congestion, for example, we stay out of the market until a break occurs and a trend is established. SwingZZ using trend lines are drawn in the daily time frame and / or 4 hours and then switched to the time frame of 1 hour. In the time frame that we will operate also we identify trend lines and mark.
- We placed an order to sell (sell stop), at least 5 pips below the low of the candle touches or intersects trendline . The trend line may be the trend in the time frame D1, H4 or H1.
- the order is placed when the candele closure.
- Note that we should expect the price Aque approaching the trend line or fairly close to this before placing the order sell stop.
- A stop loss placed at least 5 pips above the most recent swing Max. The stop loss should be used in accordance with the practices of monetary management of each trader and risk tolerance.
- The obtjetivo profit taking is placed just inside the previous minimum level of oscillation.
Operation Management: If the operation moves for the trader, this can move your stop loss up to 5 pips above each subsequent peak lower price ( lower highs) .
Buying positions
To purchase positions only the rules described for sale positions are reversed:
- Identify the general trend in the time frame in which you want to operate.
- Placing a purchase order (buy stop) 5 pips above maximum candela reaching or intersects the trendline. The order is placed when the candle closes.
- Put a stop loss just below the most recent low.
- The obtjetivo profit taking is placed just inside the previous maximum.
Operation Management: If the operation moves for the trader, this can move your stop loss up to 5 pips below the price higher and higher (lower subsequent higher lows) .
Example sale transaction
H4 price chart USD / JPY sell signals produced by the system. MT4 platform of the broker XM
The above picture shows a 4 hour chart the currency pair USD / JPY, in which we see sales transactions we could have done using this strategy, and that may have been quite profitable.
- First we see the lines bearish trend (red lines) connecting the lower high indicated by the Swing ZZ. Since the general trend is down, we should look for opportunities.
- Yellow horizontal lines indicate the points where you can place sell orders (Sell Stop) at least 5 pips below the end of the candle which intersects the trendline.
- We note as the target prices for operations are placed near the previous minimum price.
- The price has tried to break the downtrend line on several occasions but has not succeeded.